Tax Avoidance Notes
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Tax Avoidance Revision
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Tax Avoidance Arguments about the GAAR in general Brief outline of the UK of other comparative jurisdictions:
GAAR, and the GAARs
The GAAR is contained in FA 2013, s 206-215 and Schedule 43. It applies to counteract tax advantages arising from abusive tax arrangements i.e. when it cannot reasonably be regarded as a reasonable course of action, in relation to the relevant tax provisions, having regard to all the circumstances and in particular to (a) the consistency of the substantive results of the tax arrangements with the principles and policy underlying the tax provisions; (b) whether the means used in achieving those results involve the contrived or abnormal steps; and (c) whether the arrangements are intended to exploit any shortcomings. In general, there is a wide test for what constitutes a 'tax arrangement', with an additional requirement of it being 'abusive' i.e. satisfying the 'double reasonableness' criterion. 'Tax arrangement': o Any arrangement which when viewed objectively has the effect of obtaining a tax advantage as its main purpose or one of its main purposes. o Hong Kong uses the narrower 'sole or dominant' purpose test. 'Abusive': o 'Double reasonableness' test: if the arrangements entered into cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances. o This is the main safeguard for the taxpayer; it requires the HMRC to show that the arrangements entered into cannot 'reasonably be regarded as a reasonable course of action'. A court considering the GAAR must take into account the GAAR Guidance and the opinion of the Panel. This goes substantially beyond the evidence that is typically permissible in UK courts. It is necessary to enable the court to consider the policy objectives as it is required to take into account. Comparative jurisdictions o Canada: o The GAAR is aimed at 'avoidance transactions'; for such transactions, tax consequences will be determined 'as is reasonable in the circumstances' to deny the 'tax benefit' unless the transaction 'may be reasonably considered' to have been undertaken or arranged primarily for bona fide non-tax purposes. o The first case to reach Canadian courts was Canada Trustco, where the court decided in favour of the taxpayer. The court stated that 'The courts cannot search for an overriding policy of the Act that is not based on a unified, textual, contextual and purposive interpretation of the specific provisions in issue…
Notwithstanding the interpretive challenges that the GAAR presents, we cannot find a basis for concluding that such a marked departure from judicial and interpretive norms was Parliament's intent'. o However, in Mathew, the court determined that such a broad loss was not permitted or intended by Parliament, and applied the GAAR to deny the tax benefit. Arguably, the case expanded the applicability of broad statutory interpretation in the context of tax avoidance ('the basic rules of statutory interpretation require that the larger legislative context be considered in determining the meaning of statutory provisions').
This decision makes it difficult to determine the likely impact of the Canadian GAAR. This reflects on the uncertainty that may be generated by the application of the UK GAAR. In addition, the insistence of the Canadian Supreme Court to undertake its analysis with clear reference to statutory interpretation suggests that courts in the UK will continue to abide by its purposive statutory interpretation approach - what actual change will the UK GAAR therefore bring?
Function of the GAAR:
The GAAR as a 'safety net' mechanism in instances when purposive statutory interpretation fails. In that sense, it is 'extra-statutory', it 'kicks in' when purposive statutory interpretation does not find tax liability: o If there is a gap between the statute and the law as the government wants it to be, then the GAAR would apply an overriding principle at a level above other tax legislation to deal with problems not specific encountered or foreseen. o The case of Mayes was cited in the GAAR Committee Final Report, which led to the enactment of the GAAR. Aaronson QC stated that the SHIPS 2 scheme in Mayes was an example of the failure of purposive interpretation, despite it being clear that the taxpayer's success 'instinctively seems wrong, because it bears no relation to commercial reality and results in a windfall which Parliament cannot have foreseen or intended'. o It is therefore made clear in the report that '[the GAAR] operates on the hypothesis that the particular tax rules engaged by the arrangement would, on conventional purposive interpretation, succeed in achieving the advantageous tax result which it sets out to obtain'.
The function of the GAAR is not to provide a bright line between what is 'acceptable' and 'unacceptable', but to function as a guide for finding the answer that does not depend entirely on the approach by the court, but is justiciable. In praise of the GAAR:
It would prevent the stretching of the statutory interpretation to breaking point: o The current judicial approach goes beyond pure purposive interpretation, while purporting to be otherwise. This is an unclear and opaque way of approaching tax avoidance. o The GAAR would remedy this as the reasoning of the courts will not have to be hidden behind a mask of pure purposive interpretation. o Noted by Aaronson QC, in the GAAR Committee Final Report (2011): 'Judges inevitably are faced with the temptation to stretch the interpretation, so far as possible, to achieve a sensible result; and this is widely regarded as producing considerable uncertainty in the outcome of such disputes'. o However, the necessity of the GAAR as a supplement in preventing courts from stretching purposive statutory interpretation to its breaking point is dependent on what one views as purposive statutory interpretation, and the exercise conducted by the courts in this regard. o Cf. the Canadian court's treatment of the Canadian GAAR and its continued application of statutory interpretation - signals that the UK courts will continue to apply statutory interpretation, possibly. If so, what is the value added by a GAAR?
o Courts are very likely to feel constitutionally uncomfortable with using the GAAR; GAARs are often cut down by courts in other jurisdictions.
It would enable clearer, and less complex drafting of anti-avoidance rules: o GAAR Committee Final Report: 'Enacting an anti-abuse rule would make it possible, by eliminating the need for a battery of specific anti-avoidance subrules, to draft future tax rules more simply and clearly'.
This is because the GAAR provides an overall principle by which anti-avoidance provisions can be adjudged by, removing the need for specific details in the legislation itself. o Freedman (Interpreting Tax Statutes: Tax Avoidance and the Intention of Parliament) stated that 'a principle is not just a less specific rule; it is a statement about the essence of all outcomes intended within its general field'. Freedman further argues (in Defining Taxpayer Responsibility: In Support of a GAAR) that the GAAR in itself does not achieve certainty or remove the need for judicial development; rather, it provides the overlay needed to give legitimacy to judicial developments. o 'Perhaps certainty is the wrong test: when it comes to tax avoidance and determining whether a scheme will be successful, it is contended that the measure of certainty achieved by formalism is not desirable as it leads to creative compliance. Lack of certainty is not a defect, since certainty is not the aim of the exercise'. o Tax avoidance is particularly well-suited to principles based reasoning, as formalism breeds creative compliance. o This is especially given the movement back and forth between various cases: 'the history of the tax avoidance cases in the UK has been a chequered one. Principles have been developed, qualified, and possibly dashed to the ground'. This all contributes to certainty. o
Criticism of the GAAR
Failure to solve a fundamental uncertainty o It is at best a stop-gap solution; it will not remedy the underlying complexity or incoherency of the complex system onto which it is overlaid. The real solution would be to redraft the entirety of the tax avoidance legislation. o The actual solution is to have better articulated legislation that is more apt to a construction that gives effect to the legislation purpose. (Gammie argues that 'The GAAR reflects the failure of current policy and legislation and in particular the failure to think more carefully about the nature of the tax base, and to articulate it correctly with greater principle, clarity, and purpose'). o Counter-argument: Freedman, in Designing a GAAR: Striking a Balance' concludes that the GAAR is not the appropriate mechanism for a fundamental rewriting of tax law, but should nevertheless be part of any modern tax system as specific legislation will not catch every abuse.
It makes it difficult for taxpayers to comply with statutes; statutes can no longer guide the behavior of the taxpayer o This is because the GAAR is extra-statutory, as described above. o Gammie, in Moral Taxation, Immoral Avoidance - What is the Role for the Law?, highlights that such an approach is contradicted in Part D of the Guidance which offers the assurance that: 'If the statute specifies a particular period or set of conditions quite precisely, then taxpayers are entitled to assume that they are on the right side of the line if they have satisfied the statutory condition and there is no contrivance about what they have done'. Gammie argues that it is unsatisfactory that two taxpayers should be taxed differently according to whether their arrangements are 'reasonable', when they may have both complied with the wording of the statute; such notions should not represent an appropriate basis for the expansion of the GAAR to replace more precise and targeted anti-avoidance provisions. o Furthermore, there is a strong case for arguing that tax avoidance should be entirely governed by statute, and not by an overriding principle. Tax avoidance is not paying less tax than one should, according to an overriding principle. Tax
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